Abstract

The paper is an attempt to explain the reasons for the power shortages that occurred in the 2000s in China. Firstly, by examining the relationship between power demand and installed capacity, the study excludes the possibility of underinvestment. Secondly, performance evaluation shows that the average efficiency values are 85% from Data Envelopment Analysis (DEA) and 73% from Stochastic Frontier Analysis (SFA), with Total Factor Productivity (TFP) increased by 2.23% (DEA) or 0.97% (SFA) annually. Taking the estimated results of efficiency levels as well as TFP change into consideration, it is difficult to reach the conclusion that low performance is the major cause of power shortage. Finally, by resorting to business leaders and existing literature, we find that in order to reduce operation losses due to the mismatch between high market-oriented coal price and low government-guided electric price, thermal power had to reduce the need for coal by artificially lowering the utilisation rate despite urgent power demands from the market, which eventually leads to the phenomenon of power supply shortage.

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